Basic Concepts Flashcards
Positive Economics
Describes the way things are
Normative Economics
Addresses the way things should be
Economics
The study of how to allocate scarce resources among competing ends
Resources
Are inputs or factors of production
Labor
The physical and mental effort of people
Human Capital
Knowledge and skills acquired through training and experience
Entreprenuership
The ability to identify opportunities and organize production, and the willingness to accept risk in the pursuit of rewards
Natural Resources/Land
Either term can refer to any productive resource existing in nature, including wild plants, mineral deposits, wind, and water
Capital
Manufactured goods that can be used in the production process, including tools, equipment, buildings, and machinery
Opportunity Cost
The value of the best alternative sacrificed as compared to what actually takes place
Production-Possibilities Frontier/Curve (PPF/PPC)
Illustrates the choices an economy faces and the opportunity cost of making one good rather than the other
Efficiency
Means that the economy is using all of resources productively
Slope
Rise over run
Absolute Value
The value after removing the negative sign, indicates the average opportunity cost of the horizontal axes between those two points
Division of Labor
Permits people to develop expertise in the tasks that they concentrate on
Absolute Advantage
An individual has this in the production of a good when it can produce that good using fewer resources per unit of output than another individual
Comparative Advantage
An individual has this in the production of a good when it can produce that good at a lower opportunity cost than another individual
Allocative Efficiency
Requires that national output reflect the needs and wants of consumers (Marginal Cost = Marginal Value)
Marginal Cost
The cost of producing one more unit
Marginal Value
The value of one more unit
Technical Efficiency
When an economy is seeking how much of each input to use in the production process ((MPK/r) = (MPL/w))
Wage
Price of labor
Rental Rate
Price of capital
Marginal Product of Labor (MPL)
The additional output produced by one more unit of labor
Marginal Product of Capital (MPK)
The additional output produced by one more unit of capital
Distributive Efficiency
Requires that those who place the highest relative value on goods receive them
Marginal Utility (MU)
The additional utility from the last unit (Max Utility = (MU1/P2) = (MU2/P1))
Marginal Rate of Substitution (MRS)
Condition for distributive efficiency is that MRS must be equal for every individual (MRS = MU2/MU1)
Communism
A system designed to minimize imbalance in wealth via the collective ownership of property (Wealth is equally distributed among the people)
Socialism
Shares with communism the goal of fair distribution and the pitfall of inadequate incentives (Wages are determined by negotiations between unions and managers)
Capitalism
Private individuals control the factors of production and operate them in the pursuit of profit
Demand Curve
Displays the relationship between price and the quantity demanded of a good within a given period
Demand Schedule
Lists Prices and Quantities at given intervals
Law of Diminishing Marginal Utility
The decreasing satisfaction gained from additional units of a good consumed in a given period
Law of Demand
As the price of goods rises, so does the quantity demanded and vice versa
Supply Curve
Shows the relationship between price and quantity supplied
Supply Schedule
Lists Price and Quantities at given intervals
Law of Supply
As price increases, quantity decreases and vice versa
Marginal Cost
The additional cost of producing another unit
Equilibrium Point
The intersection between the Supply and Demand curves
Surplus
Producers selling too much of a good than is demanded
Shortage
Producers selling to little of a good than is demanded
Determinants of Demand
- Tastes/Preferences
- Substitute Goods
- Complements
- Income for Normal Goods
- Income for Inferior Goods
- Number of Buyers
- Expectations of Future Income
- Expectations of Future Prices
- Expectations of Future Shortages
- Taxes and Subsidies
- Regulations
Determinants of Supply
- Input Costs
- Technology
- Expectations of Prices
- Number of Sellers
- Substitutes in Production
- Joint Product Prices
- Subsidies
- Regulations
Normal Good
A good a consumer buys when there income increases
Inferior Good
A good that the consumer buys when there income decreases
Consumption Smoothing
Spending more because you know you will receive more money in the future
Price Ceiling
An artificial cap on the price of a good
Queuing Cost
The time a consumer loses waiting for a good
Price Floor
An artificially imposed minimum price
Minimum Wage
Price floor on the price of labor
